Best bits: Inheritance tax masterclass

23:49I'd want people to start building hobbies, community connections or meaningful projects before retirement so the transition doesn't feel like falling off a cliff into endless free time. That's really, really interesting.

24:03Martin Lewis:And Graham says lifespan and health span are different things. Quite right. This is what my wife specialises in, so I hear a lot about it in my house. Enjoy your health span while you can and maintain your muscle mass. You want to be able to lift cabin bags into the overhead rack at 80 and not be out of breath walking up a flight of steps. So it's both cardio is important, but weights are important and squats and being able to get up out of a chair are really important. Yeah, I think flexibility, that's when I feel. I'm quite strong and do weights. Yeah, me too. I mean, I don't bend over and pick something off the floor from one week to the next if I can help it.

24:38Martin Lewis:I ask my daughter to do it for me as well now, you know, and it's too easy. I've got, you know, can you, I don't want to do it. I do loads of exercise. I exercise every day. And I think that's one of the reasons I have the tight muscles on the back of it. But you're right. And just to do the lifespan versus health span, because this is interesting, because it's the whole, do you really want to live to 150? Actually, what we want, that's lifespan. Healthspan is about living as long as you can when you have your health to be able to be both mentally and physically functional and out there and doing things that you enjoy.

25:09And, you know, there's this big divide in this world. And again, this is all from my wife, Laura Livington, who is a health tech specialist.

25:19Martin Lewis:It's all this big divide is coming up of maximising our health spans, being healthy as long as possible. is arguably more important than maximising our lifespans. Nobody really warns you how much identity is tied to work. The money side gets discussed, the lifestyle change doesn't. Structure matters just as much in retirement as it does while earning routine purpose and social connection. Without those, even a healthy pension pot can feel empty. Yeah, well, funny enough, one of the other healthspan things as we're talking about is social interaction. You know, they say the main things are exercise, sleep, eat well, and social interaction.

25:55Martin Lewis:Those are the things that keep you going as you get older. Ashley, retired but still young. I got great advice from someone. Having a paid-off home made retirement possible. If I still had to pay my mortgage, I wouldn't be able to do it. If you can, good luck to you. Just getting rid of that big bill, getting rid of the pelican would be very useful. Otter says maintain a sense of purpose, whether by volunteering, doing casual work, having hobbies. said the first summer is joyous, but the first winter without purpose can be very depressing. Interesting. Pete follows that up. Don't retire in January.

26:33Martin Lewis:It's a harder way to start retirement than waiting until the summer months when you can get out. That's very interesting, isn't it? Yeah. You wouldn't think of that, but you can absolutely see why that works. Well done, Pete. It depends what kind of type you are. I'm hopeless with time on my hands. I'm hopeless. And I suspect you're the same one. I don't know. I don't get it. But yeah, absolutely. There are times when I think I'd just like to stop and then I think, what would I do if I did? What would fill me? What would give me the purpose to do? And I think that is one of those things about retirement.

27:07Martin Lewis:But I still go with Pete's view that if I had nothing to do, I would prefer to have nothing to do when it's 21 degrees outside than when it's zero degrees and raining and dark. So I think even with that sentiment, Adrian, and Pete's right. I'm Team Pete. Should I do Jim? Yeah, Jim's a good one, this. Go on. Be ready for your working friends and relatives to obsess over the question, what do you do all day? To which you can answer, whatever I want, whatever I want. This afternoon, for example, I shall be watching the cricket. And yes, all afternoon. Why? Because I want to and I can. I feel like we need some big round of applause, Conservation for Jim on the back.

27:51Martin Lewis:Yeah, absolutely. Have we got time for more? Go on, yeah. Let's do one or two. Matt's a wealth manager. You do a couple. I'll prepare a mastermind. Okay. Matt's a wealth manager. He says, those that take out a level annuity should look at the past few years of inflation as a warning to very much consider inflation linking. Many are not informed of this and choose the higher starting number. You'll have to stop your prep for a minute and just decode that for us, Martin. All right. So annuity is a payment each year for the rest of your life until you die. And it's one of the things people used to effectively be forced to do with their pensions before we had the so-called pension freedom, which means you can effectively use your pension like a bank account.

28:29Martin Lewis:But an annuity is still a great concept. The reason it became so unpopular is the rates were poor. What he's saying is don't get a flat annuity. So let's make it very simple. If you pay for an annuity and it pays you£5 ,000 a year for the rest of your life, well, that£5 ,000, if you live 30 years, will be worth a lot less in 30 years than it is now. So pay for an annuity which goes up and is linked to inflation. So you'll get the equivalent of£5 ,000 in future money every year for the rest of your life. Clearly, the rate you get at the start would be lower, but it would go up. And if you are getting an...

29:03Martin Lewis:Look, the biggest piece of advice I can give anybody on retirement in terms of the finances is do not do anything with your pension until you have made a pension-wise appointment. That's a totally free guidance system offered. It's non-profit. is paid for by a levy on the financial services industry. And there are so many things you can get wrong with taking money out of your pension or using your pension money, including not getting an index-linked annuity, including just getting an annuity with your pension provider, that the hour appointment you get with these people to give you specific bespoke guidance is the most important thing that you can possibly do.

29:36Martin Lewis:And if you're lucky enough to be wealthy, then go and pay for independent financial advice too. But the guidance is free to everyone. Karen's got a good one. Try to live on your projected pension for three months before retiring. You get a feel for it if it's doable, and you save money too. You need more than you think for days and meals out. Exercise and eat healthy now. Your body will thank you later. Retirement is not good in poor health. It's a good point. You've got more time on your hands. You probably will probably end up spending more money. Yeah, you will. I mean, life doesn't work the way around we think it.

30:11Martin Lewis:We work for, what, about 40, 45 years of our 80-ish year life, and the rest of it we're having to pay for the other years. You might think, well, hold on, no, I didn't for the early years. But, of course, we have a cross-generational subsidy that your parents paid for you while you were a child and you will pay for your children, so that sort of evens out. And then, of course, you've got to pay for your retirement. So, yeah, I mean, it is hefty. It is hefty.

30:35Well, we get back on to inheritance tax now. We've got a caller, Sarah in Weybridge. Sarah, what can we do for you? Oh, hello, yes. I wonder if you could give me some advice. So my father has been widowed twice, once was my mother and another, my step-mum. He seems to think he can have three inheritance tax nil rate bans, two because he owned a house both times his wife died. So he thinks he can have two 500s and one 325. so a total of 1.325 million he's gotten state over 1.5 million and he's concerned about having to pay any inheritance tax at all so we've told him to give and live obviously the seven-year rule but yeah i'm just a bit dubious whether he he's right in thinking he's got 1.325 as a nil weight well we've got harriet here and so we've got a tax lawyer on it

31:35Martin Lewis:My understanding is you're right, he's wrong. You can only have yours and one spouse's. And in fact, the reason that's important is if you had two people who had both had previous spouses who had passed away, a widow, let's say a widow and a widower, could be two widowers or two widows, but you get the point. Then they actually, when I talked earlier that marriage is a really good way to reduce inheritance tax in their cases, if they got married, they're potentially losing their previous allowances from their past spouses. so it could be negative for them. Because I talk about that, I think, Harry, you're going to say you can only have the two, aren't you?

32:09The maximum that you can have is a total of two nil rate bands. However, if you had a situation where, for example, the most recent spouse, say, had used half of their nil rate band, but the previous spouse also had some nil rate band, you could have the half that the previous spouse had and then some from the first spouse to a maximum of one extra nil rate band. So you are completely right as to the outcome. The reasoning is slightly different. And the only thing to add there is the amount that is available on a transferable nil rate band is the amount of the maximum is the amount of the nil rate band at the time of that first death.

32:57so if you had somebody who died before it was 325 000 pounds and you could you could that that does happen the maximum would be the maximum they had there so i think you said your your mother died in 1979 she did yes yeah so that that would be a lesser full amount but equally if the if your step-mom had a full nil rate band that wouldn't matter because you couldn't get any more than that anyway.

33:25Martin Lewis:And Harriet, just to clarify on the nil rate band, I'm so sorry, that you've got a 325 ,000 nil rate band and a 175 ,000 nil rate band. I presume it's a maximum of one each of those, it's not a combined 500 ,000? No, it's a maximum of one each of those. The residential nil rate band is calculated slightly differently, but in almost all situations, it will come out to the same thing so you can have your 325 your spouse's 320 well former spouses up to 325 and the same for that 175 your own 175 plus up to 175 for former spouses i interrupted your question i'm so sorry do carry on no that's fine so so it's a maximum of 1 million is all that he can have then to pass on even though my mum i never received anything from my mother when she died obviously i was still quite young in the first instance.

34:20Yeah, so that is unfortunately correct. There are some other things that you could look at doing. Live and give is actually really not bad advice if you don't want to pay inheritance tax at all. Something that often comes up in inheritance taxes, although I say a lot, is I say, you, the person passing money on, doesn't have an inheritance tax problem. The next generation does. If you want to help them solve that, that's fine, but you're not obliged to it's not really your problem um so i think it is worth reiterating that that that's on a practical note but you might want to look at if there's a possibility of gifts out of income if there are looking at potentially exempt transfers i think you said your father was 86 is that right he was yes he is yeah so you know whether or not making a gift now and waiting seven years looks like being a viable option maybe um you know that's that's going to be dependent on your father's health let's just do give and live for people who are listening because we haven't talked about it yet and it's incredibly important and i'll do the very simple version first if you give a gift to somebody anything without reservation so this is not a case of saying i'm going to give you my home but i'm going to live in it and not pay any rent that that's a gift with reservation you've got to it's got to be a proper gift you know if you were going to do that you You could probably say, I'll give you my home, but I will pay you a commercial rent for it.

35:45And Harriet can discuss whether that would be acceptable or not. But you give somebody a proper gift. If you live three years, the inheritance tax rate you pay is reduced on that gift. So it's no longer the 40%. It starts to get lower. It tapers down until if you live seven years after you've given the gift, then it is no longer part of your estate because you gave it away more than seven years ago. and therefore there would be no inheritance tax on the assets that you give away. And that's what give and live is talking about.

36:14Martin Lewis:Now, obviously, at your father's age, being blunt, because we have to be, I mean, I think, you know, we'd be hoping the three years we'll be getting for that. The seven years is a long time and statistically is getting a bit more dicey. But every year after three year, it improves, doesn't it, Harriet? That's absolutely right. The percentage starts going down in year three, more in year four. I think it's 20%, possibly 20 % a year. that seems right that would taper down to nil so the rate reduces significantly by the time you get to year say five or six and then then after seven years you have a completely exempt gift so yeah he could do that the other thing he might want to think about is something that martin already mentioned which is if his primary objection is inheritance tax and you don't need all of his estate he could look at giving to charities in a value over 10 percent of his estate.

37:03That's a possibility as well. There's still more to come on inheritance tax, including the big change, which is that pensions from 2027 are going to be included as part of your estate. Plus, we will run through in detail all the different gifting rules and allowances where you can give money away and it doesn't count as part of your estate for inheritance tax purposes.

37:30Hello, right. We're into our podcast only extras bit now, and I'm very lucky to still have Lucy Spencer, financial planning partner, UK wealth managers, Evelyn Partners with us,

37:40Martin Lewis:and Harriet Brown, tax barrister, chartered Institute of Taxation fellow and presenter of the International Tax Bike podcast, still with us to carry on going through the unsurprisingly enormous number of questions that you sent about inheritance tax. And we're going to plough through as many as we can in the time that we've got. So let's get straight into it. The next question, and we're expecting this, and I think Lucy, it's one for you. Joyce says, please, can you cover the new rules about pensions and inheritance tax and how it works for those who have defined pensions? It seems to penalise those who have defined contribution pots that can be easily valued.

38:16So, Lucy, the latest up to date from next year, your unused pension would count towards your inheritance tax assets, wouldn't it? It will do. And Joyce, for your information, it only affects the defined contribution schemes and they are easily valued. It's valued as at the date of death. So regardless of what age you pass away post April 27, your pot will be in your estate for inheritance tax purposes, subject to those nil rate bounds, which we discussed earlier. there is a difference to how they are taxed when they're withdrawn depending on if you die before age 75 or if you die post age 75. So if you die post age 75 the funds will be liable to inheritance tax at 40 % but then also liable to income tax as at the beneficiary's marginal rate when they take the income out of the pension.

39:14If you die pre-age 75, even up to age 74, 364 days, then your beneficiaries can take the money out of pension income tax-free, but they will still be liable to inheritance tax. Okay, so I just want to make sure I've got this right. Until the day before your 75th birthday, it counts as part of your estate for inheritance tax, or it will count as part of your estate, the amount of money in your pension, if it's a defined contributions pot. That's the money pot. You know, that's when you're saving up and you see you've got an amount of money. It's those type of pensions rather than final salary pensions.

39:48Once you're aged 75 and over, if you've got money left in there, then not only will it be inheritance taxable, but when the person who gets the money tries to take the income out, they're going to have to pay income tax at whatever rate they pay. So if they're a high rate taxpayer, you're going to have another 40 % off. It is a double form of taxation.

40:04Martin Lewis:I mean, this is a massive change coming, isn't it, Lucy? And in many ways, because pensions weren't in the inheritance tax regime, many people were sort of operating that they would leave their money in their pension because it was a good way of passing assets inheritance tax free. Has this totally shaken up all the type of inheritance tax planning that you do with clients and thrown it all up in the air? It very much has done. So for years, I've been working with clients that actually were spending down their ISA allowances, spending down their general investments accounts. Now we're revisiting that planning, especially for those over 75 because of that double taxation rules.

40:43When we were speaking earlier, we mentioned gifts out of regular income. Money taken from pensions can class as income. So we are seeing a lot of clients now actually drawing more income to gift away to make those gifts out of regular income. I mean, this is seismic, isn't it, for your world? at the level of incomes that people who come to someone who's a financial planning partner, they're going to be relative to high net worth individuals. And it's a complete change. It is very much a complete change. And there's a lot of pensions out there, which I haven't been touched. And there's some large pensions out there as well.

41:16So now we are just revisiting our clients' financial planning, revisiting their future planning in terms of how they prepare for passing on their wealth to their family. And Harriet, is the law locked in now or are there still things to be decided on this? Yes. So the policy isn't going to change now. This is going to happen. It's still possible that it might be tinkered with in the coming finance bill, but it's not going to change in any material respect, I wouldn't have thought at this stage. Martin, could I add one more thing? Of course. Pension, please. For everyone out there that has a pension, regardless if it's a large pension or you don't have an inheritance tax liability, but for everyone, make sure your nomination of beneficiaries forms are up to date, because that really tells the trustees of the pension scheme who you want to pass it to.

42:05So I put a clip on social media about that very issue yesterday. Yeah, people often think that pensions are covered in their will. It's not. It's the for a private or work pension. It is the trustee or pension provider who decides where your money goes. And your nomination form or beneficiaries form or expression of wishes form is what tells them well how you tell them where you want it to go. You would have done it when you were signing up, but you'd be surprised how many people get in touch with me and annoyed because, you know, their partner's just died. They're not married and it's gone to their partner's ex-wife, not them, because that form wasn't updated.

42:34So I would echo your thoughts very much.

42:37Martin Lewis:Let's move on to our next question. Sian, is money paid into a junior ISA outside of the estate for the purposes of inheritance tax in the same way money paid into a pension is? I wouldn't have thought so here. let's check with Harriet. I don't think there's any special ISA exemption is there? No I mean you could put money into a junior ISA and survive the gift by seven years but in the hands of the junior whose ISA it is it would still be within their estate. Yeah I mean junior there's no special rules so all the other gifting and exchange rules still apply to this but there's no special giving somebody money to put in an ISA rule and we need to come on to the gifting stuff I have it in my questions.

43:20Really interesting one from Celia here. Harriet, I'll start with you on this. Can you refuse inheritance if the estate has debts over its value? You can. I'm assuming the reason this is being asked is because there's a concern that if you take the inheritance, you're liable for the debt and that's simply not true. So realistically, you wouldn't need to disclaim the inheritance. you could simply just ignore it because there wouldn't be anything to inherit once the estate had been wound up.

43:53Martin Lewis:But the difficulty is if you wanted someone had a house and they had lots of debt, you can't just take the house and not take the debt. I mean, it's the estate that would pay the debts effectively, but that would still have to be paid, wouldn't it? Absolutely, yes. So you don't have to pay debts over the value of the estate, but equally you can't just take the property, sadly. Yeah, you've got to take the good and the bad that all comes with it. Gillian. I'm a single person, divorced, so no spousal allowance received. Property and now inclusion of pensions an issue if I die before I spend them.

44:26What should I be looking at? I think, Lucy, this is in your bag, isn't it? So what I'd recommend is, depending on who she wants to pass her pensions to, we can look at things like the gifting out of natural and excess income rule, which is immediately exempt. If she has other capital, she could make potentially exempt transfers. And also on potentially exempt transfers, any growth on that money is immediately outside the estate as well. So if you give a lump sum of£300 ,000, and then that grows in value because it's invested, it's only the£300 ,000, which you need to last seven years, the growth is automatically outside the estate as well.

45:07So the potentially exempt transfer is the seven year rule or the three to seven year rule that we talked about earlier yeah let's just we're going sean's question is next the allowed 250 pound gifts can you give only one 250 pound gift per person per tax year uh can you give multiple 250 pound gifts to the same person in a tax year no you can't it's one per person but let's just do lucy let's go through all those other gift

45:31Martin Lewis:allowances available that we'll start with there's a three thousand pound rule isn't there Yeah, so there's the large gift allowance, which is£3 ,000 per individual per tax year. And what that means is, so I can give£3 ,000 in my large gift allowance, either to one person or splits between multiple people. And also I can reclaim a tax year as well. So if you haven't given that£3 ,000 last tax year, you can effectively give£6 ,000 today. So this is just so people understand, this is outside of the seven-year rule, Outside of the giving money from surplus income rule, you're allowed, you as an individual can give up to£3 ,000 per tax year without paying inheritance tax on it.

46:16Martin Lewis:How do you denote that you're using this large gift allowance? Do you have to note down that that's what your intention was or is it just back count? So I recommend with all gifts and that's the small gift allowance of the£250. we've spoken about the large gifts allowance for the 3000 or any gifts actually written down either on a piece of paper or on a spreadsheet and held with your will because when you come some passes away and you come to complete their inheritance tax form there's actually a whole list where you have to detail all of the gifts which you've made leading up to your death so no I definitely make a note of it and put in one column and just put large gifts allowance for this tax year okay so So I can give money from surplus income.

47:00I can give money away as long as I last seven years and it's a gift without restriction. I can give£3 ,000 to as many people. My maximum I can give is£3 ,000, but I could share that between different people. What's the£250 rule? So the£250 rule, effectively, I could stand on a street corner and give£250 to as many people as I wish. What I can't do is give one person£1 more. So if, say, Martin, I was to give you£250, Harriet£250 in this tax year, what I can't do is then come back to you, Martin, and go, I'll actually have another£50 on top of that. How does the£250 small gifts to an individual...

47:45So the£250 you can give to as many people as you like, but maximum£250 to a recipient. The£3 ,000 rule is the maximum that the giver can give. How does the£3 ,000 rule and the£250 rule interact? The person who you've given the£3 ,000 to, you can't then give them the£250. OK, so they have to be totally separate. The way I kind of look at it is you give your daughter£3 ,000 and then you give your grandchildren£250. Makes sense. And then Peter, is it really necessary to keep evidence of all gifts over£250 for seven years, given that most people don't know when they're going to die? My recommendation and interested to hear Harriet's views on this as well is if you keep a list of all of the gifts you have made, it will make things so much easier for your executives when they come in to fill in your inheritance tax forms.

48:38Harriet, what do you think? I completely agree with anything. Keeping contemporaneous evidence as you go along is always going to put you or your estate executives in much better position to deal with HMRC. So, yes, absolutely. It's not that onerous to keep evidence of gifts for seven years, I don't think. So, yes, I would recommend doing it as well.

49:03Martin Lewis:OK, so now I'm going to ask you both a tricky question. So, Lucy, we're going to take your calculator away. You're answering this as a human being outside of your normal place. And, Harriet, we're taking your wig off. I presume you wear a wig sometimes. I don't know. I may be wrong. Your barrister's wig off on this one. At what age would you say it is sensible for people to start keeping notes on all this type of stuff? You know, at what point in life do we start to start thinking, well, just in case there might be an administrative issue if I were to pass away? go on harriet let's put you on this one first early 40s genuinely because that's sort of when depressing well you know i i think i'm in my mid-40s and i recently had the surreal experience of having a friend die of cancer and thinking yes that was too early but it wasn't tragically early because it's around this age that these things start to happen so i would say with an abundance of caution early to mid-40s.

50:01Lucy? So I would say I'm going to go slightly later than Harriet and I'll go in your 50s. That's still depressing, Lucy. Maybe when you've received an inheritance, so your wealth is more, so you start to come over those nil rate bounds. For me, it's I'm a financial advisor, it's about the amounts and if you've been diagnosed with an illness, start to keep those records then. For me, any point you go over those nil rate bans, so inheritance tax becomes a concern for you. And the good news is, once you've lived anything that's more than seven years ago, we don't really have to bother about that much because that's gone then, isn't it?

50:41Do we still keep records then? I'd recommend keeping records for 14 years just because some allowances may have been used up in the previous year. So my advice is 14 years and it'll probably save you some legal costs as well.

50:57Martin Lewis:So we've now done giving gifts away from income. We've given potentially exempt transfers, the if you live longer than seven years, the large gift,£3 ,000 allowance, the multiple small gift,£250 allowance. But then there are also, I believe, special occasion allowances for things like weddings, aren't there? I don't know if either of you, Harriet, maybe you've got a list of those. I have I'm looking at the relevant section of the legislation which is obviously very helpful so you've got gifts in consideration of marriage or civil partnership where a parent of either party to the union can give five thousand so if all four parents gave the maximum that would be twenty thousand yeah parent or step-parent I'm guessing as well yes yes you could yeah yeah other people who are relations so grandparents could give 2 ,500 and anybody else can give a thousand on the occasion of marriage okay nice any other allowances in similar similar vein or it's all about marriage is it i was just going to also say you can also gift your large gift allowance with that as well so the three thousand pounds we spoke about so it's not exclusive so if you're a parent you could give on someone getting married you could give them eight thousand pounds outside of your estate, even if you were to horribly pass away the next week.

52:16Yes. Cool. We've got one more question, I think, and I think we'll stop there. Hopefully we managed to cover most things that people want. Colin, will a SIP, a self-invested personal pension, drawdown be considered as part of my estate? It will be inherited by my only son. He's a high rate taxpayer. Should he keep it invested and can he draw down on it outside of the estate? I think, Lucy, that is probably you. So the SIP will be part of Collins Estate post-April 27. If he dies before he reaches age 75, then he'll pay inheritance tax on it. But no, his son won't pay income tax on it. If he passes away post-age 75, then his son will pay inheritance tax and then income tax, which is quite significant for a higher additional rate taxpayer.

53:07What I would recommend is actually he seeks financial advice with his son to see are there other options? Does his son need the money? Could he pass to grandchildren, for example?

53:18Martin Lewis:Very interesting. Both of you absolutely brilliant. Thank you so much for joining us. That's Lucy Spencer from Evelyn Partners and Harriet Brown, who is the presenter of the International Tax Bites podcast. Thank you so much. Hopefully we have demystified or at least made you understand the complexities of inheritance tax today. That's it for this week. We tend to put out a new episode every Thursday and Monday. The Monday one is our Question Time podcast where you can ask me absolutely anything and everything, open brackets, within reason, close brackets. If you've enjoyed it today, please tell your friends you've been listening to the Martin Lewis podcast.

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